IRS Publishes Adjusted Amounts for 2021 Earned Income Credit, Child Tax Credit, and Premium Tax Credit

These Tax Credit Changes Reflect Provisions in the American Rescue Plan Act (ARPA)

The IRS recently issued a new revenue procedure (Rev. Proc. 2021-23) to establish the updated limits and amounts for certain tax credits, which reflects changes that were made to the tax code by the American Rescue Plan Act of 2021. This includes the Child Tax Credit (CTC), the Earned Income Credit (EIC), and the Premium Tax Credit (PTC).

American Rescue Plan Act (ARPA) of 2021

The latest stimulus bill, the American Rescue Plan Act (ARP or ARPA), was signed into law by President Biden on March 11, 2021. This legislation provided $1.9 trillion in funding for stimulus checks, unemployment benefits, tax credit expansions, and other COVID-related relief.

Most of the tax amendments included in the American Rescue Plan are temporary and apply to tax year 2021 only, however, some changes go beyond this year. If you are unsure about whether you qualify for these tax breaks, it’s recommended that you seek the advice of a professional tax advisor to help you navigate these tax law changes.

Child Tax Credit (CTC)

The Child Tax Credit is a partially refundable tax credit designed for people with children. Generally, eligible taxpayers can claim up to $2,000 per qualified dependent child, and up to $1,400 of that is refundable for low income families.

Solely for taxable years beginning in 2021, the American Rescue Plan (section 9611) increases the Child Tax Credit (under § 24 of the Code) to $3,000 for qualifying children who have attained age 6 but not 18 by the end of the 2021 taxable year. It also increases the amount to $3,600 for qualifying children who have not attained age 6 by the end of the 2021 taxable year.

For taxable years beginning in 2021, the Child Tax Credit is refundable for certain taxpayers up to $3,000 for each qualifying child age 6 or older and $3,600 for each qualifying child who has not attained age 6. A taxpayer is eligible for the increased refundable amount only if the taxpayer, or the spouse of a taxpayer filing a joint return, had a main home in the United States for more than half of the taxable year beginning in 2021 or was a bona fide resident of Puerto Rico for the taxable year beginning in 2021. For all other taxpayers, the refundable portion of the credit is limited to $1,400.

Earned Income Tax Credit (EIC or EITC)

The Earned Income Tax Credit is a refundable tax credit for low- and moderate-income workers. The amount of this tax break may change if you have children, dependents, are disabled, or meet other criteria.

Solely for taxable years beginning in 2021, the American Rescue Plan (section 9621) temporarily modifies the Earned Income Credit (under § 32 of the Code) to provide special rules – including, for example, special rules for eligible individuals with no qualifying children and applicable phaseout amounts.

For taxable years beginning in or after 2021, the American Rescue Plan (section 9624) modifies the tax code to provide that the EIC is not available for taxpayers whose aggregate amount of disqualified income exceeds $10,000. The amount will be adjusted for inflation for taxable years beginning after December 31, 2021. Unlike the previous tax credit changes, this is a permanent provision.

For taxable years beginning in 2021, the following amounts are used to determine the EIC. The ”earned income amount” is the amount of earned income at or above which the maximum amount of the earned income credit is allowed. The “threshold phaseout amount” is the amount of adjusted gross income (or, if greater, earned income) above which the maximum amount of the credit begins to phase out. The ”completed phaseout amount” is the amount of adjusted gross income (or, if greater, earned income) at or above which no credit is allowed. The threshold phaseout amounts and the completed phaseout amounts shown in the table below for 4 married taxpayers filing a joint return include the increase provided by the American Rescue Plan, as adjusted for inflation for taxable years beginning in 2021.

Note that for taxable years beginning in 2021, the EIC is not allowed if the aggregate amount of disqualified investment income exceeds $10,000.

Premium Tax Credit (PTC)

The Premium Tax Credit is a refundable tax credit that’s designed to help eligible taxpayers cover the cost of their health insurance premiums.

For taxable years beginning in 2021 and 2022, the American Rescue Plan (section 9661) amends the Applicable Percentage Table in the tax code to provide temporary percentages. Taxpayers use the applicable percentages (in § 36B(b)(3)(A)) to determine the amount of the PTC they may claim for a taxable year. This does not amend the required contribution percentage that a taxpayer uses to determine whether the taxpayer and members of the taxpayer’s family are eligible for employer-sponsored minimum essential coverage. Consequently, the 3 required contribution percentage of 9.83% for 2021 (provided in section 2.02 of Rev. Proc. 2020-36) is unchanged.

For more information about these tax credit changes, please refer to IRS Rev. Proc. 2021-23.